Using Credit Cards for Retainers and Trust Accounts

One of the most commonly asked questions regarding our Law Firm Merchant Account service pertains to the rules surrounding trust accounts. The rules and requirements vary state by state, so you should check with your local bar to determine which of the following scenarios will work for you.

Scenario 1:

Tie the trust account directly to the merchant account and have discount fees withdrawn in a separate transaction.

With this configuration the entire deposit will be placed into the trust account. A separate transaction will withdraw the discount/processing fee from the trust account. Often the merchant can configure the discount fee to be withdrawn at the time of the transaction deposit, or once monthly in a batch. In either scenario, it is most common that the discount fee be accounted as an "instant payment discount" that is expensed by the law firm as a benefit to having rapid payment, similar to a discount one might offer for paying in cash. An accounting journal entry and money transfer should be done from the law firm's operating account to the trust account as soon as possible to cover the discount fee.

The disadvantage to this setup is that in the event of a charge back, the merchant bank can directly withdraw funds from the trust account to reverse the transaction. That access to the trust account by the merchant bank can run afoul of trust accounting rules in some situations.

In most states, this is an acceptable configuration for collecting retainers as well as collecting for invoiced work since a transaction can be immediately done to move earned fees to the firm's operating account.

Scenario 2:

Tie the law firm's operating account to the merchant account and have discount fees withdrawn in a separate transaction.

With this configuration the entire transaction amount will be deposited to the operating account, then in a separate transaction the discount fee will be withdrawn for easy accounting. Unearned funds should be immediately transferred into the trust account. Discount fees, as with scenario 1, are written off as an expense.

This method is simple from a bookkeeping standpoint and solves the non-lawyer access problem presented in Scenario 1. Be aware however that some states consider the funds co-mingled during the time that unearned funds are in the operating account waiting to be transferred to the trust account.

Scenario 3 (ideal):

In this scenario, the merchant account is tied to the trust account, as in scenario 1, with a once a month transaction for the discount fee that is written off as an expense by the law firm. The difference here is that the merchant is configured to take the discount and charge disputes from the operating account and not the trust account.

This configuration creates clean deposits and restricted access to the trust account. Expenses are taken automatically from the operating account. Earn funds can be transferred to the operating account as they normally would.

The only hold-up with this configuration is that with rampant fraud in the credit card industry, many merchant providers are reluctant to withdraw funds from an account other than the deposit account. They prefer to work with the deposit account because it is most likely to contain available funds.

Scenario 4 (ideal+practical):

In this scenario, the law firm opens a checking account as a "short term holding account" that is neither an operating account or trust account.  The idea here is that the merchant service is only tied to this holding account and that a small balance is maintained to cover transaction fees.  When a transaction occurs, the law firm immediately transfers the client funds to the actual trust account. Thanks to online banking, this transfer can occur very quickly.

While not as strictly compliant as Scenario 3, this is the practical reality as most merchant providers will not draw fees from a separate account.  The added benefit to this configuration is that the merchant provider only has access to an account that maintains a very low balance.  In essence this creates a layer of protection for the law firm against charge-backs and disputes.

More Information:

If you'd like to learn more about how a merchant account can benefit your law practice, be sure to check out our law firm merchant account services page, or simply contact us to set up a time to talk.